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May 21, 2013

China's Alibaba Is Soaring, But Avoid The IPO

Profits of Alibaba Group, the world’s biggest online retailer, more than doubled in the three months ended in December, jumping to $642.2 million from $236.9 million a year earlier.

Revenue in the quarter was up 79.9%.  Yahoo!, which holds a 24% stake in the Hangzhou-based company, reported the results on the 7th of this month in its SEC filing.

Moreover, Alibaba’s prospects look strong.  Morgan Stanley says revenue could grow 59% this year and 44% in 2014.  Profits might hit $2.18 billion in 2013.

Not surprisingly, all eyes are on Alibaba’s IPO.  Jack Ma, who founded the company in his apartment in 1999, professes not to know when it will occur.  In 2012, he said it might happen in five years.  Most analysts expect a listing within months, certainly by the end of 2014.

Who wouldn’t want to own Amazon, eBay, PayPal, and Groupon all rolled into one? That is essentially what Ma, 48, has created for the Chinese market.

Some think the offering could be bigger than Facebook, which valued the Menlo Park company at $104.2 billion.  Estimates at the top end peg Alibaba, which earns profits ten times those of Facebook, at $120 billion, but most analysts believe the IPO will be moderately priced, perhaps as low as $62.5 billion, 84 times estimated 2012 net income.

The thinking goes that Ma’s offering of a subsidiary in 2007 in Hong Kong was such a disaster—he had to delist the company last year—that he will be cautious when he floats the entire group.  The upcoming IPO, most agree, will be a winner for existing institutional shareholders like Yahoo! and new investors.

There is only one problem: Tencent Holdings is standing in the way of Jack Ma’s dreams.  Just imagine if Facebook, Twitter, Zynga, and Tumblr were all available to users on the same platform.  That’s Tencent, “the winner-take-all social player in China.”  And Ma Huateng, the company’s admired chief, is intent on monetizing the country’s social media.  Don’t bet against him because he has the tools to cut Alibaba down to size.  Tencent’s wildly popular WeChat messaging service, for instance, is perfectly suited to taking shoppers away from Jack Ma’s company.

Ma realizes the danger.  He knows, for instance, that he has to go mobile.  Mobile phones have passed personal computers as the No. 1 way to access China’s internet, where the Chinese increasingly go to shop.

In mid-April, Alibaba unveiled smartphones with Aliyun, its own mobile operating system.  Then, at the end of last month, the company announced its first big foray into selling advertising in social media with the purchase of an 18% stake in Weibo.  Each day, 46.2 million Chinese go to the microblogging service, with about three-quarters of them doing so through mobile devices.  And this month Alibaba bought 28% of Beijing-based AutoNavi Holdings, a mapping company, for $294 million.  The purchase will allow Ma to target consumers with advertising, Alibaba’s primary source of income.

Analysts see Ma’s moves and applaud—he has the air of inevitably at the moment—but the risks are great for Alibaba.  For one thing, by going into phones he took on Google, which has already taken a bite out of his company.  The search giant forced Android seller Acer to end its partnership with Alibaba just hours before Ma was to announce his operating system last September, canceling the launch.

And the heavily indebted Alibaba shows desperation by overpaying for admission to China’s social media scene.  It plunked down $586 million for less than 20% of Weibo when the whole service had been valued as little as $600 million before the purchase. Moreover, there is no guarantee that Ma will be able to monetize Weibo: web portal Sina Corp., the seller, saw the loss of almost half its stock value as it tried to make the service profitable.

 “They own this marketplace that nobody else owns, that’s growing at a pace that nobody else is growing,” says David Tawil of Maglan Capital, referring to Alibaba.  Yes, Alibaba, with more than 90% of China’s market for consumer-to-consumer transactions and over half of the business-to-consumer market, has a commanding e-commerce lead, but there are few barriers to entry.  Shenzhen-based Tencent, China’s biggest internet firm, has the resources to take on Alibaba and the management capable of doing so.

Tencent’s Q1 numbers show how strong a company it is.  It reported a 37.1% increase in profit from the same quarter in 2012 due to growth in online gaming and e-commerce.  Overall, revenue was up 40.4%.  Its e-commerce revenue jumped 154.2% year on year, reaching 1.9 billion yuan.

There are two internet giants in China right now, each invading the turf of the other.  The problem for Alibaba is that it is much harder for it to penetrate China’s prickly social media market and monetize it than it is for Tencent to go in the opposite direction.

Text by Forbes
 

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